Can You Handle the Truth?

Discovering the real value of your business can be unwelcome news.

In the highly-regarded 1992 film A Few Good Men, a verbal confrontation takes place in a military courtroom where tough Marine Colonel, Jessup (played by Jack Nicholson), sitting in the witness stand, asks, “You want answers?”

In the Commercial Cash Flow column from the July issue of Cleanfax, you were acting out a part as well, as you role played the owner of a commercial carpet cleaning company that you had listed for sale with a business broker.

Although you offer mainly commercial carpet cleaning services, you are also diversified into other service offerings, so you thought your business looked quite attractive to potential buyers.You were sure potential buyers would soon be contacting your broker and appointments to meet and negotiate the sale would quickly follow.

But the selling process didn’t go quite as you had expected, and in fact, the truth of the entire situation was a bit tough to handle.

A bad deal

After several inquiries with no serious offers, Mary and Sam came along. If you recall, Mary was the fictitious commercial carpet cleaning salesperson in several articles. After finding some success in her sales career, she put in her resignation and moved to your area, and is now trying to buy a business. Her husband, Sam, has some experience buying businesses. He’s helping her find the right company to purchase.

They offered you less than half of what you were asking. This was a bad deal, you thought, so you declined the offer.

They still wanted to meet, and you agreed. Part of the reason you agreed is you wish to discuss why they came in with such a low offer.

Tough negotiations

When you sit down to meet with them, Mary takes the lead, heading the discussion with you and your broker. She might have been a great salesperson, but you quickly notice she does not have a lot of tact.

She has a handout she wants you to see. In it are statistics from a few sources, including Richard Parker’s The Business for Sale Buyer’s Resource Center.

The statistics include:

90 percent of people who begin to buy a business do not buy one

Only 20 percent of businesses listed for sale ever sell

Business brokers are responsible for 10 percent of all businesses sold

Roughly 50 percent of deals that are agreed upon between the seller and the buyer actually close.

You kind of laugh to yourself and think that if she is trying to convince you to lower your price, being negative about your business isn’t going to help. At the same time, you are shocked at these figures.

Your broker recommends, “Let’s just stop the discussion right now.” But you want to hear more. After all, from the information you received from the broker before these discussions began, you learned that Mary has a great reputation and Sam has bought other businesses.

Mary goes on and she asks you if you have recently reviewed BizBuySell or BizQuest. You acknowledge you have because your commercial carpet cleaning business is listed on both.

She tells you that there are thousands of businesses listed, and that only 20 percent will actually sell and change ownership. The remaining 80 percent means there are a lot of unhappy business owners who can’t find buyers.

Mary gives you the three top reasons why businesses don’t sell. She starts to list them.

1. Distressed

Signs of distress might include regular bills not being paid on time — or paid at all. It also might be that the equipment included in the sale is aging, and isn’t that valuable. A demoralized staff also adds to the signs of distress.

2. P&L troubles

Many business profit and loss (P&L) statements do not show a profit. Yet the business is on the market, priced as if it was generating enough profit for the new buyer to actually make the first payment. There is no available profit to make the business loan payment and no money for the new owner to use to grow the company.

3. Decline in revenue

The last three years of sales show a decline or downward trend in sales. The most recent quarter looks even worse. There’s a clear downward trend that can’t be overlooked, despite years of growth in the past.

The bottom line

Mary explains to you that she is trying to show you the true value of your business, according to what she sees. You do not like the way she is doing it, yet you find it difficult to ignore the information.

She has not mentioned anything negative about your own business — but that’s about to change.

Sam takes over. He says he will cover some of the specifics that they feel need to be addressed, and thus the reason why they offered you much less than your original asking price.

They like your company, but explain, “We are buying your job and not an actual business.”

You start to get a little hot under the collar, just like that Marine Colonel Jessup, mentioned in the beginning of this article… and you realize you need to be careful not to become overly confrontational. It didn’t do Colonel Jessup much good, and probably won’t do you much good, either.

But you have to say something. You sit up straight, try to keep an even voice, and explain to both of them that it is definitely a “business” that you worked in for many years, and it provided a nice income for your family. You are simply ready to sell the company for what you feel is a reasonable profit.

No deal?

Sam and Mary realize that you — most likely — will not sell to them, but still ask if they can continue. You agree, although it seems to be wasting your time as well as theirs.

Sam outlines four areas that are specific to your business that they would like to address.

The first is that many services are being offered by your company, but Sam points out that you show no income for wood floors, although you list the service on all your trucks and marketing materials. He points out that there is not much tile work being sold, little vent cleaning, etc. He says there is no focus, and customers do not associate you with any one thing.

The second is that you claim to have repeat customers, but they cannot find the reports that give specific numbers of customers and how many times each repeated. Sam finds it challenging to put an actual number on it.

The third is that there is not a file or manual that shows your system of obtaining new customers. The marketing is really at the starting gate, and it seems you do not have a marketing plan.

The fourth, he says, is the “big one.” It deals with both Sam and Mary saying they are buying a job, not a business. He calls it the “hit by a bus” or “the you” factor. In a nutshell, you are everything and do everything. Sales, marketing, product ordering, truck repair, bookkeeping, meeting customers, answering the telephone, etc. Without you, the company collapses.

Great. Now you are worried about that bus. A sleepless night awaits.

Could it be the truth that all this time, you couldn’t handle the truth?

In the next Commercial Cash Flow column, we’ll dig deeper and learn how to look at the actual P&L information, recasting, earnings before interest, taxes and amortization (EBITA) and multiples for different business sizes.

Fred Geyen is president of the Geyen Group (www.GeyenGroup.com). His background includes commercial product sales and program development for residential, commercial and disaster restoration with ServiceMaster. He has a Leadership in Energy and Environmental Design Accredited Professional (LEED-AP) designation and is on the board of directors with the LMCCA. Geyen can be contacted at (612) 799-5111.